Plans to diversify Brazil’s hydro-dominated electricity market continue to move ahead, most recently boosted by the just announced solar tendering rounds. With a clear need for additional power generation capacity (~63 GW by 2022) to satisfy a growing population and economy, opportunities are opening up in Brazil’s expanding solar utility-scale and distributed generation segments.
Apricum’s Project Manager Martin Mitscher explains the changing dynamics of Brazil’s electricity market and gives an outlook on its sizeable solar potential.
What is the outlook for Brazil’s power sector and what role can solar play?
To understand the role of solar in Brazil, we need to first take a look at the context of power generation in Brazil. Brazil has a very unique electricity sector that mainly relies on its vast potential for hydro power generation. Approximately 80% of electricity came from large centralized hydro power stations in the last year. As the cost of hydro power is low, solar power has largely been disregarded as a valid alternative for centralized power generation by the government. However, increasing demand for electricity and a prolonged period of little rainfall in the past months have revealed the severe shortcomings of the current generation matrix; water levels in power plant reservoirs are currently extremely low and the absence of rain has led to an extensive use of expensive thermal generation capacity, thus driving up the cost of power procurement. One megawatt hour of hydro or wind-powered generation costs between 100 and 150 BRL (approx. 33–50 Euros); the same amount of energy from a gas-fired plant can cost 600–700 BRL (approx. 200–232 Euros), as those plants are operated in Brazil mainly as reserve power plants.
Consequently, to reduce dependence on the increasingly unreliable generation of hydro power and costly gas-based reserve capacity, the government is directing efforts at diversifying its generation matrix. Next to more cost-effective thermal plants and wind turbines, solar power will play an important role in re-shaping Brazil’s power generation sector.
How much solar power do you expect in Brazil over the next few years?
It needs to be understood that contrary to most European countries, Brazil has a strong need to expand its power generation capacity. With a growing population and economy, the economic upswing of the recent past has lifted many people up to the broadening middle class where they tend to consume more electricity. As this trend is expected to continue, several gigawatts of newly added capacity will have to come online over the next decade. By 2018, the government plans to contract almost 40 GW in total. So far, the government has allotted ~ 3.5 GW of this to solar – however, if prices of solar power continue to decline, this figure could be adjusted upwards in the midterm. Besides centralized procurement, the state tenders for solar energy can account for another few hundred MW of solar. Nevertheless, it will be the federal government auctions that constitute the major driver for utility-scale solar market development.
What will be the main tools for Brazil to promote solar power?
Centralized auctions mandated by the Ministry of Energy and Mines and held by regulatory agency ANEEL are the main procurement channel for centralized power projects in Brazil. In the utility-scale segment, this will be the primary market for solar companies. Just a few weeks ago, the government’s planning authority for energy released plans to exclusively tender solar power generation capacity for the first time in Q3/2014. In parallel, some states such as Pernambuco and Minas Gerais have announced or already held individual solar auctions, mainly as a means to stimulate local industrial development. This may emerge as a significant alternative market at least in the short to mid-term for solar project developers.
On the free market where bilateral contracts are signed between producers and off-takers, pricing is expected to remain a challenge for solar power. This is why the strong support of political decision makers is important to stimulate a healthy development of utility-scale solar in Brazil.
Besides the utility segment, what is going on in the residential market?
In addition to the strong dynamics we currently see in the utility-scale solar segment, there is a lot of potential for distributed solar generation; small-scale systems below 1 MW that are mostly installed on private and commercial rooftops. In some Brazilian states, people pay just about the same for their electricity as people in United Kingdom, The Netherlands, Italy and Belgium (up to 0.20 EUR/kWh). With all the sunshine Brazil is famous for, these people can substantially reduce their electricity bill if they install a solar system. There is a massive potential for PV power in this area and we believe it can become as important as the utility scale-segment in the coming years.
So what is preventing the residential segment from fully taking off?
Probably the most difficult problem to overcome at the moment is the lack of long term financing options at bearable interest rates for solar systems in Brazil. System prices are also still high, because there are no scale effects in procurement, yet the installation sector is barely existent, and not least because of the high share of tariffs and charges companies are facing in Brazil. But this will change very quickly once demand picks up.
Luckily, a net-metering scheme introduced in 2012 has cleared the way for distributed solar on the legislative side. However, regulation also remains in constant flux. For example, net-metered solar power is subject to full VAT in some states, while in others it is exempt. The risk perception for such long term investments is therefore still quite high.
Whom do you expect to become major players in Brazil’s solar market?
Certainly the already established players in Brazil’s power and infrastructure industries will claim their share in this emerging market. Most power utilities and construction conglomerates have gained first experience under an R&D program carried out last year and will try to leverage that in future procurement rounds. We also expect a number of more agile and dynamic project developers to be active in the sector, similar to what we have seen in the wind market. International solar companies will have the best chance to participate in solar auctions by partnering with local players. Especially solar EPCs and project developers can join forces with Brazilian companies to build competitive bidding consortia.
So does this news mean that Brazil will finally step onto the stage as a major solar power market?
Yes, I think this is a valid conclusion. It will certainly take some time before we see the first power plants coming online and the final market volume is somewhat volatile, but with this stimulus of the centralized auctions, we are looking at a prosperous solar future for Brazil.
For any questions or comments, please contact Martin Mitscher, project manager: mitscher@apricum-group.com
